AI Drafter 
TaxTMI 
TaxTMI 
2021 (2) TMI 1250
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....r. ITA No.3241/Del/2014 (by the Assessee) & ITA No.3114/Del/2014 (by the Revenue) (A.Y. 2007-08) 3. Facts of the case, in brief, are that the assessee is a company engaged in the business of manufacturing and trading of herbal products of health and personal care, cosmetics and veterinary products and FMCG products, etc. It filed its return of income on 26th October, 2007 declaring nil income which was processed u/s 143(1) of the IT Act. The case of the assessee was selected for scrutiny and notice u/s 143(2) of the IT Act, 1961 was issued and served on the assessee on 29th September, 2008. Subsequently, the assessee company revised its return of income on 18th March, 2009 wherein it revised its book profit u/s 115JB to Rs. 2,80,57,67,940/- as against Rs. 263,44,87,072/- declared earlier. During the course of assessment proceedings, the AO noted that net profit of Rs. 284,22.30 lakh has been declared from the sales of Rs. 1778,02.43 lakh and other income of Rs. 16,51.17 lakh as per copies of audited Profit & Loss Account, Balance Sheet and its annexures filed along with Audit Report during the course of assessment proceedings. As per revised 'Computation of Taxable Income' fi....
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.... 2) That the CIT (Appeals) has erred in sustaining the addition to the extent of 0.50% alleged to have been charged as service fee for the corporate guarantee given by the appellant to Dabur Egypt on various factual and legal grounds. 3) That without prejudice to Ground No. 2 above, giving of corporate guarantee is not the international transaction by which the concerned AE has been benefited and accordingly the addition to the extent of 0.50% in respect of the service fee alleged to have been charged on the corporate guarantee given to Dabur Egypt is arbitrary and bad in law. 4) That in the absence of any contract as existing during the year between the assessee and three AEs, neither any royalty accrued during the" year nor can it be presumed to be receivable and consequently the order of the TPO and sustained by the CIT (Appeals) are without any basis/material and are based on surmises and conjectures not permissible under the law. 5) That the TPO and CIT (Appeals) failed to consider the geographical conditions of working of Dabur International UAE, Dabur Nepal and Asian Consumer Care Ltd., Bangladesh having no substantial awareness about the Dab....
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.... 3. On the fact and in the circumstances of the case the CIT (A) has erred in deleting the addition of Rs. 96,67,520/- on account of interest of loan advanced to Dabur International Ltd., UAE, an Associated Enterprises and has also erred in holding that in case of loan given in International currency, the interest rate to be applied should be LIBOR plus margin. 4. On the fact and in the circumstances of the case the CIT (A) has erred in /restricting the addition for royalty receivable by the assessee from Dabur International .Ltd., UAE to 2% on total FOB sales in place of royalty @ 3% of FOB sales as determined by the TPO. 5. On the fact and in the circumstances of the case the CIT (A) has erred in restricting the addition for royalty receivable, by the assessee from Dabur Nepal Pvt. Ltd., to 2% on total FOB sales in place of royalty @ 7.5% of FOB sales as determined by the TPO. 6. On the fact and in the circumstances of the case the CIT (A) has erred in deleting the addition of Rs. 70,49,000/- and directing the AO to re-compute the deduction u/s 801B and 80IC of the Act without further allocation of the head office & other expenses to various uni....
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....ussions, there are two CUP rates available (i) the external CUP in which the State Bank of India has provided a rate of 2.75% and (ii) an internal CUP in which the assessee has stated that HSBC has charged a rate of 1.25% for providing the bank guarantee to the assessee. In the facts and circumstances of the case I am inclined to take mean of two available rates. The mean of two available CUP rates work out to 2%. This rate of 2% is further enhanced by 200 basis points being the adjustment for the risk that the assessee is bearing. Detailed discussion in this regard has been done in the preceding paragraph. The working of the Corporate Guarantee charges is made as below: Value of Bank Guarantee Rs. 802.40 Lacks Charges @4.00% as discussed above Rs. 3,209,600 I therefore determine the arm's length price of providing the services by the assessee in the shape of bank guarantee to AE at Rs. 3,209,600/-. An upward adjustment of Rs. 3,209,600/- is made on this account. Since the assessee has not charged any amount on account of providing the guarantee, the amount of Rs. 3,209,600/- is more than 5% of the value of international transaction." 11. The AO accordingly ....
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....e of means of capital financing. Therefore, guarantee in context of international transaction means providing of non funding support tc the other person whether there is a cost or not to be incurred by the guarantor. The feet that the guarantor took a risk in proving such a guarantee cannot be totally overlooked. Given the risk, there is possibility of impact on profit, losses, assets or liabilities of guarantor. No person will assume this risk without being adequately secured and demanding some form of return. Accordingly, I hold that issuance of corporate guarantee is an international transaction and ALP is required to be computed u/s 92. 6.2 It now clearly emerges that providing guarantee is an international transaction and it needs to be benchmarked as per provisions of section 92(1). The Appellant had charged NIL rate for providing the corporate guarantee and in its TP study report, has justified arm's length compliance by following TNMM. The appellant has taken a position that provision of corporate guarantee is integral part of sale transactions and hence it need not be separately benchmarked However, the appellant has not explained how this transaction of providing....
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....rom EGP Loan of 3550000/- and a miniscule interest savings for UDS loan of 473000. The appellant contended that the entire interest savings cannot be solely attributed as service fee due from its overseas AEs because oversee AEs do have their own credit rating and negotiating power with the banks. 6.4 I have carefully examined the submission of the Appellant and other evidences placed on record. As regards Dabur Nepal, NABIL Bank stated that it would not have charged any extra interest with or without corporate guarantee. This is evidence directly from the bank concerned and hence cannot be ignored. Further, it has been noted that corporate guarantee has been released on 27th July 2006. This means that corporate guarantee provided by the appellant remained in operation only for four months period comprised in FY under consideration. Hence, with respect to Dabur Nepal, I hold that no service fees towards corporate guarantee can be charged. Hence, I direct the AO to delete the additions made on account of corporate guarantee in case of Dabur Nepal. 6.5 In case of Dabur Egypt, the letter from HSBC Bank states the loan facility was available to Dabur Egypt at a rate o....
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.... assessee was further secured by way of back to back guarantee in case of default in loan repayment by foreign AEs to the foreign banks. Besides, the back to back guarantee, the assessee also reserved the right to receive interest for period of default in excess of 2% of prevailing bank interest. (f) Loan advanced by the bank to AEs was not on the basis of corporate guarantee given by the assessee to the bank. Further, the AE got no significant advantage of lower rate of interest from bank if assumption of benefit of corporate guarantee is considered. The loan given by bank was on pure financial consideration of the AE concerned. The bank has secured the loan by way of charge of assets of the borrower. He accordingly submitted that no service fee was charged by the assessee from its AEs on account of issue of corporate guarantee. 15. The ld. Counsel for the assessee submitted that in case of corporate guarantee due to lack of external comparable transactions, one has to deploy a method to determine the economic benefit arising from the financial guarantee. There is guidance provided by foreign revenue authorities which have held that the yield or the "interest saved" co....
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....antee issued to Dabur Egypt Ltd., Egypt is concerned, the ld. Counsel for the assessee submitted that the assessee had issued corporate guarantee of 4.899 crores (EGP 3.55 Million) to HSBC Bank, Egypt, SAE against the loan of EGP 3.55 Million and USD 450,000 raised by Dabur Egypt Ltd., Egypt. He submitted that such guarantee was released in the year 2011. Referring to page 345 of the paper book, the ld. Counsel for the assessee drew the attention of the Bench to the letter dated 11th September, 2013 issued by HSBC Bank, Egypt SAE and submitted that in the said letter, on account of release of corporate guarantee requested by Dabur Egypt, the bank increased the interest rate from 11.90% to 12.5%. Therefore, as per the said letter, the incremental interest saved due to guarantee provided by the assessee was 0.60%. However, since the benefit of an explicit guarantee accrued to both the guarantor and the borrower, the interest benefit should ideally be split between the parties to the transaction i.e., the borrower and the guarantor. He submitted that usually as a rule of thumb the interest benefit is split between the guarantor and the borrower on 50:50 basis which is considered to be....
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....21.1. So far as the guarantee issued on behalf of Dabur Egypt Ltd., Egypt is concerned, although the ld.CIT(A) appreciated that interest savings on account of corporate guarantee was restricted to 0.60% only, but, proceeded to consider an ad hoc rate of 1% towards corporate guarantee out of which 50% was attributed towards service fee. Accordingly, he determined the service fee on account of corporate guarantee at 0.50% as against 4% adopted by the TPO and deleted the balance addition made by the AO. It is the submission of the ld. Counsel that no cost or expenses have been incurred by the assessee for issue of corporate guarantee in favour of its AEs. It is also his submission that the loans obtained for the foreign AEs of the assessee were secured loans having a charge against the assets of the AEs and other collaterals offered by AEs. The assessee had given corporate guarantee on behalf of AEs only to provide an additional cover against the loans obtained and, therefore, no addition is called for. 22. We find some force in the above arguments advanced by the ld. Counsel. So far as the corporate guarantee to NABIL Bank,, Nepal against the loan of Nepalese Rs. 6 crores obtained....
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.....30% in respect of corporate guarantee issued to Dabur Egypt Ltd., as against 0.5% held by the CIT(A). Thus, the ground raised by the Revenue on this issue is dismissed and the ground raised by the assessee is partly allowed. 24. Grounds No.4 to 7 by the assessee and Grounds No.4 and 5 by the Revenue relates to the part relief granted by the CIT(A) on account of royalty adjustment. 25. Facts of the case, in brief, are that the TPO, during the course of TP assessment proceedings noted that the assessee has not received any royalty from its AEs. He noted from the records that in the assessment year 2005-06 and 200607, the assessee had received royalty from Dabur Nepal (P) Ltd., Dabur International, UAE and Asian Consumer Care P. Ltd., Bangladesh, the details of which are as under:- Company Royalty received in AY 2005-06 Rs. in Lakhs Royalty received in AY 2006-07 Rs. in Lakhs Royalty received in AY 2007-08 Rs. in Lakhs Dabur Nepal (P) Ltd Nepal 43.34 5.34 -- Asian Consumer Care P. Ltd Bangladesh 46.87 21.02 -- Dabur International UAE 164.41 -- -- 25.1. The TPO referred to the agreement entered into by the assessee with its AEs ....
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....ted 1195 71.70 NIL 71.70 266.67 266.67 27. The AO accordingly made addition of the same to the total income of the assessee. 28. Before the CIT(A), it was submitted that the assessee had taken the value of royalty as NIL following its consistent position post FY 2004-05. It was submitted that after 31st March 2005, the assessee had stopped charging royalty from Dabur Nepal and Dabur International owing to change in the business arrangement w.e.f. 01-04-2005. However, the AO, following its earlier order for AY 2006-07, proposed to charge royalty at the old and controlled rates. In doing so, the AO violated the basic principle of transfer pricing i.e., comparison of controlled transaction with the uncontrolled transaction. It was argued that even if the AO had to apply the royalty rates, such rate arrived at should have been uncontrolled for the purposes of transfer pricing. It was argued that the AO/TPO, without going into the merits of this year's case, proceeded to make adjustment on the basis of previous year. It was brought to the notice of the ld. CIT(A) that his predecessor has decided the issue partly in favour of the asse....
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....pplied in case of Dabur Nepal Pvt. Ltd. and Dabur International Ltd, UAE and restricted the arm's length price from Asian Consumer Care Pvt. Ltd. at Rs. 23.90 lakhs. 31. The relevant observations of the ld.CIT(A) from para 12 to 12.9.5 of his order read as under:- "12.0 FINDING: 12.1 I have carefully gone through various contentions raised by the appellant and other material placed on record. The relevant facts are that the appellant (Dabur India) is legal owner of brand 'Dabur' and other sub-category brands like 'Vatika', 'Hajmola' etc. Overseas AE's of the appellant had been using Dabur India's trademarks and trade names. Upto FY 2004-05, the appellant was getting royalty payments from its AE's, whereas during FY 2006-07, appellant did not receive any royalty. 12.2 The case of the appellant is that the agreements under which royalty was received in earlier period were no longer in existence. Moreover, the overseas AE's are incurring substantial expenses for brand promotion in their respective territories and therefore there is no payment of royalty. In order u/s 92CA(3), the TPO computed arm's length price of royalty as under: Rs.in lakh....
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....nd Dabur Bangladesh have spent significant AMP expenses (advertisement, marketing and promotional expenses) and therefore 'Dabur' brand is being built up in foreign territories by the efforts of AEs of the appellant and hence in fact AEs are providing service to the appellant for which AEs need to be remunerated. However, no remuneration for such services is being given to AEs and accordingly no royalty is being charged from them because if such remuneration is taken into account, it will exceed the royalty chargeable and hence income of the appellant shall further go down. The appellant has further argued that even otherwise, the value of brand 'Dabur' is not very significant as no state of art technology is involved in manufacturing process of products involved. These contentions of the appellant have been duly considered. Firstly, it cannot be said that value of brand 'Dabur' is Nil as no royalty has been accounted for by the appellant. There must be some value of the brand for which royalty income has to be determined having regards to arm's length price. Secondly, the appellant has not established that AE in Nepal, UAE and Bangladesh are incurring abnormal AMP expenses which e....
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....-how, information, operational improvements and skills in area of cost management, manufacturing, production procurement, sale marketing and distribution of products. It also permitted Redrock to use Dabur logo on both products manufactured by using Dabur's technology and know-how and also products manufactured by its without Dabur's know-how. As per clause 4 of the agreement, Dabur India Ltd. is entitled to royalty of 3% of FOB sales of Redrock of Dabur branded products which are manufactured using Dabur's know how and 1% of FOB sales of Dabur branded products manufactured without using technical and R&D support from Dabur. Based on this, the TPO has computed royalty chargeable from Dabur International Ltd. @ 3% of sales while the appellant has not declared any royalty income, The appellant has contended that w.e.f. 01,04,2005, this agreement has been terminated and has furnished letters dated 07.04.2005 and 01.02.2013. the appellant has further contended that Dabur International was not sourcing any technical knowhow from Dabur India for its products manufactured in UAE and has furnished letters dated 18.07,2011 and 20.07.2011 which state that products manufactured by Dabur Inter....
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....rnished by the appellant, it is seen that products manufactured by Dabur International in UAE are different from those manufactured in India and in case of same name of products, it has been shown that oil base (raw material) is different from those products manufactured in India. Therefore, it can be safely inferred that most of the products if not all, manufactured in UAE are being manufacture without technical support from Dabur India. In view of this, there shall be a portion of FOB sale on which royalty become payable @3 % and another substantial portion of FOB sales on which royalty' shall become payable @ 1%. In view of these facts, it shall be more realistic and reasonable if royalty payable is worked out @ 2% on total FOB sales ie. Average rate. Accordingly, I hold that arm's length price of royalty from Dabur International is Rs. 22.58 lakhs. The AO is directed to give relief to the appellant on this account accordingly. 12.8 Dabur Nepal Pvt. Ltd., Nepal 12.8.1 The appellant has entered into an agreement dated 05.11.1992 with Dabur Nepal Pvt Ltd., clause 3 of which is reproduced as below: "That as Dabur is allowing DNPL to use its trademarks....
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....tention of the appellant carries some weight as rate of royalty might have been fixed after considering reimbursement of marketing expenses by Dabur India. The TPO has not established that this contention of the appellant is factually incorrect 12.8.4 Considering the contentions of the appellant that it had not met with obligations cast upon it under clause 3 of the agreement, it would not prudent to apply rate of 3% as mentioned in amended agreement to work out royalty chargeable. It is also seen that international transaction of allowing use of trade name/trade mark to its AEs by the appellant is the same with respect to Dabur International and Dabur Nepal. Therefore, there is no reason to assign higher price in respect of international transaction with Dabur Nepal than that with Dabur International. As discussed supra, I have held that royalty at rate of 2% of FOB sales would be arm's length price in respect of Dabur International. Accordingly, I hold that royalty at rate of 2% of FOB sales would be arm's length price in respect of Dabur Nepal also and this would take care of non¬discharge of obligations on part of the appellant. In this manner, royalty chargeable f....
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....e upto AY 2006-07. The TPO has treated said agreement dated December 2003 as basis for arm's length price in the absence of any comparable provided by the appellant Now the issue is whether TPO is correct in adopting 6% rate of royalty chargeable from Dabur Bangladesh. The approach of TPO in relying upon agreement dated December 2003 and not considering amended agreement dated 01.04.2005 is fallacious as contemporaneous material/document should have been considered instead of document which is remote in time. Accordingly, TPO is not correct in applying rate of 6% and ignoring rate of 2% as mentioned in amended agreement. 12.9.4 Further, appellant has argued that as per amended agreement, there should not be any charge of trademark royalty as Dabur Bangladesh has incurred more than 8% of AMP on sales as a pre requisite. Besides this the Appellant contends that no technology has been provided by them to Bangladesh. However, no cogent evidence has been produced by the Appellant that no technology was provided by them after 01-04-2005. The contentions of the Appellant that agreement was not in force after 01-04-2005 and hence no technology could have been provided has not been....
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....ther associated enterprise. He accordingly submitted that the entire adjustment of Rs. 2.67 crores made by the TPO ought to be directed to be deleted. 35. So far as agreement with Dabur Nepal Pvt. Ltd., Nepal, is concerned, he submitted that the associated enterprises, viz, Dabur Nepal Pvt. Ltd., Nepal was incorporated in the year 1992 wherein 97.5% of shareholding was held by the assessee directly/indirectly. During the year 1992, the assessee, for the purpose of manufacturing consumer products, entered into a marketing agreement dated 05.11.1992 with Dabur Nepal Pvt. Ltd under the apprehension of expected technical, marketing, financial and managerial support for the manufacture of hair oil, Lal Dant Manjan, Dant Mukta, tooth power/tooth paste and herbal candies, etc. As per this agreement, the parties agreed to the following: a) That Dabur Nepal will be entitled to use the trade mark of 'Dabur' for sale of products in Nepal and abroad during the duration of the agreement; b) That the assessee will assist in recruitment of specialized personnel to train and impart information on technical know-how and marketing of produce to personnel at its production works ....
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.... was payable by M/s Dabur Nepal Pvt. Ltd to the assessee; c) Even otherwise, since, the assessee had failed to discharge its obligation to bear the marketing costs which included the advertisement and remuneration to sales personnel, the assessee does not have any right to charge any royalty from Dabur Nepal Pvt. Ltd. d) On application of FAR analysis and considering substantial marketing expenses incurred by Dabur Nepal, there was no ground for recovery of royalty. e) The assessee along with Dabur Foods Ltd, India was purchasing 72% of the products manufactured by M/s Dabur Nepal Pvt. Ltd., the details of which are tabulated as under: Particulars Amount in Nepal Rs. Lakhs) Sales to Dabur India Ltd. 11,004.83 Sales to Dabur Foods Ltd., India (Related party) 14,224.82 Total sales to group companies in India 25,229.65 Total sales of Dabur Nepal 35,181.11 % of sales to Indian group companies 72% 39. He accordingly submitted that in view of the above, no royalty could have been charged by the assessee in respect of those goods which were sold to the assessee and its group company. 40. Without prejudice to the ab....
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....ssee. c) In consideration, the assessee would be entitled to royalty as follows: a. 3% of FOB Sales of Dabur branded products which are developed and marketed by Dabur International through technical and R&D support from the assessee and which are manufactured in accordance with technical specifications detailed by the assessee; b. 1% of FOB Sales of Dabur branded products which are developed by Dabur International from any other party without any technical and R&D support from the assessee. 43. Referring to clause 5 of the agreement, he submitted that the aforesaid agreement was for a period of 24 months (i.e., expiring on 31.03.2005). He submitted that due to heavy advertisement expenditure incurred by Dabur Dubai and refusal of the assessee to reimburse the brand building expenses, Dabur International vide letter dated 07.04.2005, informed the assessee-company that no royalty would be payable to the assessee with effect from financial year 2005-06. The said letter was accepted by the assessee vide communication dated 01.02.2013 addressed to Dabur International wherein it was confirmed that the agreement has ceased to operate w.e.f. 01.04.2005 and al....
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.... f) On application of FAR analysis and considering substantial marketing expenses incurred by Dabur International, there was no ground for recovery of royalty which has been appreciated by the ld. CIT(A) at page 33 and 33 of his order. 46. He submitted that at the time of entering into the agreement, Dabur International was considering to manufacture products with the technical and R&D support of the assessee in respect of the Ayurvedic/herbal products. However, subsequently, it realized that the ayurvedic products were not acceptable in UAE because there were no Ayurvedic doctors available and only the Unani system of medicines was acceptable as per the local trend and custom. As a result, Dabur International abandoned its idea to manufacture Ayurvedic/herbal products and entered into the business of FMCG products which were manufactured by them with their own technology as per the requirement and considering the taste of local public. Thus, no technical know-how of the assessee was utilized by Dabur International. 47. He further submitted that brand value in a particular area does not depend upon ownership but it depends upon various factors like quality and accepta....
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....ing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transaction. 52. He submitted that if the assessee was to charge for trade mark royalty from Dabur International, then, the Indian Company would have to pay the AMP expenses of Dabur International, which are in fact, significantly more than the royalty that would have been received by the assessee. For the above proposition he drew the attention of the Bench to the analysis of AMP spent by Dabur Dubai which is as under:- S. No. Financial year Sales (in lakhs) AMP (in lakhs) % of AMP to Sales 1. 2004-05 5427 631 11.62% 2. 2005-06 7643 1416 18% 3. 2006-07 11425 2298 20% 4. 2007-08 14926 2241 15% 5. 2008-09 21728 2918 13.5% 6. 2009-10 27474 5740 21% 7. 2010-11 34540 10524 30% 8. 2011-12 49823 14284 29% 53. Referring to the above, he submitted that significant amount of AMP expenses of Rs. 22.98 crs. were incurred by Dabur International on brand building, which far more exceeded the r....
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....its own, in accordance with the requirement and local taste of the local public; e) Income arising from an international transaction shall be computed having regard to the arm's length price which shall be determined as per provisions of Section 92 and section 92C of the Act; f) As per the provisions of section 92C of the Act read with Rules 10B and 10C of the Income Tax Rules, 1962, for the purpose of making transfer pricing adjustments, the ami's length price has to be determined on finding out similar type of payments received by similarly situated and comparable independent entities; g) The lower authorities have not applied any transfer pricing method as prescribed under the Act and simply made the adjustment in respect of royalty based on the earlier agreements which had already expired and there was no new agreement between the assessee and its AEs." 56. He submitted that the rate of 0.75% adopted by the Tribunal in its order for assessment year 2006-07 is ad-hoc, arbitrary and excessive. He submitted that in the order, the Tribunal though correctly appreciated the facts of the present case that: (a) there was no enforceable royalty agreemen....
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....tronics India Pvt. Ltd., vs. ACIT (ITA No.5140/Del/2011) (vii) Nimbus Communications Ltd vs ACIT (ITA No 2361/Mum/2007 (viii) Dresser Rand India Pvt Ltd vs Addl. CIT (ITA No 8753/Mum/2010) (ix) Thyssen Krupp Industries India Pvt Ltd vs ACIT (ITA No 7032/Mum/2011) (x) Hero Motocorp Ltd vs Addl CIT (ITA No 5130/Del/2010) (xi) Kodak India Pvt Ltd vs ACIT (ITA No 7349/Mum/2012) (xii) AWB India Pvt Ltd vs Addl CIT (ITA No 4454/Del/2012) (xiii) Kirby Building Systems India Ltd vs. Addl CIT (ITA 1975/ HYD/ 2010) (xiv) McCann Erickson India Pvt. Ltd. (ITA No.5871/Del./2011) (xv) Ericsson India Private Ltd. (ITA No.5141/Del./2011) (xvi) SC Enviro Agro India Ltd vs DCIT (ITA No 704/Mum/2010) 60. Referring to the order of the Tribunal, he submitted that if the Tribunal would have applied any of the 5 prescribed method, in such scenario, the rate of royalty would have been 'Nil'. He accordingly submitted that the rate of royalty of 0.75% adopted by the Tribunal in assessment year 2006-07, cannot be applied in assessment year 2007-08 without application of any of the methods prescribed under section 92C....
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..... 66. The ld. Counsel for the assessee further submitted that while dismissing the appeal, the Hon'ble High Court observed that the assessee's submissions that the transaction cannot be scrutinized cannot be accepted and further observed that the assessee is required to explain why the "Dabur" brand has been permitted to an overseas entity without any charge. He submitted that "Dabur" was mentioned by the subsidiary only as a recognition of ownership of the company and not as a brand outside India. Secondly, huge advertisement expenditure was incurred by the subsidiary outside India and therefore, there was no warrant to justify charging of any further fee. 67. Lastly, the ld. Counsel submitted that it is settled law that any adjustment can only be made by application of one of the prescribed methods and the Tribunal clearly held that none of the recognized methods were applied by the authorities. Being so, the Tribunal, in assessment year 2006-07, ought to have deleted the entire addition rather than partly confirming the same. Further, Dabur International had spent significant AMP expenses and accordingly, the brand 'Dabur' was built in UAE by the efforts of Dabur Inter....
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....o pay royalty to the assessee at the rate of 6% of FOB sales (net of taxes and sales return) which were developed and marketed by ACCPL using technical know-how and R&D support of the assessee. Referring to page 39 of the paper book, he submitted that the aforesaid agreement was amended with effect from 01.04.2005 wherein it was provided that no trademark royalty will be payable to the assessee where ACCPL incurs cost of advertisement, marketing and promotion (AMP Expenses) in excess of 8 percent on sales every year. He submitted that till December, 2005, ACCPL was using the technical knowhow of the assesse to manufacture its products. However, the said products so manufactured did not meet the expectations of Bangladesh market. Accordingly, after 2006, ACCPL started using technical know-how of Dabur International, which was able to cater to the needs of people of Dubai. Accordingly, during the assessment year 2007-08, there was no agreement in existence with ACCPL and the said company was, in fact, using the technical know of Dabur International. He accordingly submitted that no royalty was received by the assesse during the year under consideration due to the following reasons: ....
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.... to be looked at. He submitted that prior to the agreement entered by the assessee with Dabur International, the presence of Dabur in Bangladesh was negligible. The 'Dabur' brand was almost non-existent there. It was only due to the significant advertising and marketing undertaken by ACCPL that the brand of 'Dabur' was built in Bangladesh. He submitted that the assessee was not required to contribute any amount towards such brand building exercise. He submitted that even otherwise also if it is assumed that the agreement was in existence, even in such circumstance, no royalty was receivable by the assesse as the AMP expenses of ACCPL were more than 8%. 72. The ld. Counsel for the assessee drew the attention of the Bench to the analysis of AMP spent by Bangladesh which is as under: S. No. Financial year Sales (in lakhs) AMP (in lakhs) % of AMP to Sales 1. 2004-05 998.81 118.63 11.88% 2. 2005-06 1438.89 164.92 11.46% 3. 2006-07 1335.93 195.13 14.60% 4. 2007-08 988.32 182.63 18.42% 5. 2008-09 1548.18 269.82 17.37% 73. Referring to the above, he submitted that significant amount of AMP expen....
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....ement with the following three AEs:- a) Dabur Nepal Ltd., Nepal; b) Dabur International Ltd., UAE; and c) Asian Consumer Care Pvt. Ltd., Bangladesh. 78. In terms of the agreement entered into with the aforesaid entities, the assessee allowed its associated enterprises to provide assistance in recruitment and imparting technical know-how, etc,, and permitted use of its trademark 'Dabur' for sale of products. The aforesaid agreements were, however, subsequently rescinded since the assessee did not provide any marketing support nor imparted any technical knowhow and further considering that substantial advertisement and marketing expenditures were incurred by the AE's outside India. Accordingly, it was stated that no royalty was receivable/ received by the assessee from its associated enterprises during the impugned assessment year 2007-08. However, the TPO rejected the arguments advanced by the assessee and held that the associated enterprises have used the brand-name/trade mark owned by the assessee without any compensation and accordingly, computed arm's length price of royalty as follows: Company Name FOB Sales (Rs. in Lakhs) Rate of royalty ....
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.... shareholding in Dabur Nepal Pvt. Ltd., Nepal directly/indirectly and, thus, it could not have received any royalty from itself. It is his submission that the marketing agreement dated 05.11.1992 which was valid for a period of ten years had expired and the Nepal Government had not renewed the said agreement later on. Thus, in the absence of any legally enforceable agreement no royalty was payable by Dabur Nepal Pvt. Ltd., Nepal to the assessee. It is also his submission that since the assessee had failed to discharge its obligation to bear the marketing costs which included the advertisement and remuneration to sales personnel, the assessee does not have any right to charge any royalty from Dabur Nepal Pvt. Ltd. It is also his submission that the assessee along with Dabur Foods Ltd, India was purchasing 72% of the products manufactured by M/s Dabur Nepal Pvt. Ltd., and, therefore, no royalty could have been charged by the assessee in respect of those goods which were sold to the assessee and its group company. 81.3. So far as Dabur International Ltd., UAE is concerned, it is the submission of the ld. Counsel that no royalty could be charged from Dabur International Ltd., UAE du....
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.... manufactured by ACCPL were not accepted in Bangladesh and that it had to manufacture the products as per the local needs and taste of the public residing in the public area. It is also his submission that in order to penetrate the Bangladesh market, ACCPL adopted its own market strategy and had made all the efforts for the establishment of 'Dabur' name in the Bangladesh which was very little known in that geographical area and incurred lot of expenses on advertisement, market establishment and had borne all the risks of market, manufacture and finance. Accordingly, the assessee had neither made any efforts in establishing the trade name in Bangladesh nor had made any contribution towards the same. 81.5. It is the submission of the ld. Counsel for the assessee that although the Tribunal in the assessment year 2006-07 has deleted the royalty from Dabur Nepal, however, had restricted such royalty from Dabur Dubai to 0.75%. According to him, such royalty at 0.75% from Dabur, Dubai is incorrect since none of the prescribed method to calculate the ALP of Royalty has been applied. Therefore, no addition on account of royalty from Dabur Dubai and Asian Consumer Care, Bangladesh can be ....
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....y informed the assessee vide letter dated 07.04.2005 that heavy advertisement expenditure were to be incurred by them and the assessee had not agreed to reimburse such expenditure incurred, therefore, the royalty payment agreement ceased to exist w.e.f. Financial Year 2005-06. For the said proposition, both the parties agreed (copy of the said letter is placed at page no. 122 of the assessee's paper book). So, there was no agreement for the year under consideration to make the payment of royalty as agreed in between M/s Redrock Ltd. UAE and the assessee. In the instant case, when the agreement was in existence, the assessee provided technical knowhow and R&D support in respect of the products which were mainly Aurvedic medicines and Herbal products. But later on, the assessee entered into business of FMCG products and acquired M/s Redrock Ltd., UAE and also changed its name to M/s Dabur International Ltd., UAE. In the earlier year, M/s Dabur International Ltd., UAE formerly known as M/s Redrock Ltd. had paid the royalty @ 1% because no product had been manufactured with the help and support of the assessee and the agreement was only upto 31st March 2005, the payment of royalty was ....
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....of competition and whether the markets are wholesale or retail." 35. From the co-joint reading as contemplated u/s 92C of the Act read with Rules 10B and 10C of the Income Tax Rules, 1962, it would be clear that for the purpose of making transfer pricing adjustments, the arm's length price has to be determined on finding out similar type of payments received by similarly situated and comparable independent entities. But in the present case, no comparable case has been brought on record by the TPO or the ld. CIT(A) while making adjustment on account of royalty. Moreover, no agreement was in force to charge royalty from the AEs and that the FMCG products are new to the assessee who is known for its Herbal and Aurvedic products. In the instant case, it is not brought on record that the assessee had incurred any expenses for marketing the products manufactured by M/s Dabur International Ltd. (AE) in UAE and that the assessee either made any efforts or contributed any money for the establishment of its name in geographical area of UAE and the products manufactured by the UAE were not different from the products manufactured in India by the assessee. Moreover, the claim of the a....
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.... the assessee. However, for the year under consideration, the FMCG products were manufactured which were different from the Indian products having different raw material and medium used in the manufacture. At the same time, the brand name of the assessee was used by the AE and in the earlier years the assessee provided the R&D support, know-how technologies etc. which helped the AE for the year under consideration also to some extent. It is also noticed that the assessee received the royalty @ 1% in the preceding year. The TPO also while working out the royalty rate for the year under consideration was of the view that the royalty @ 1% was chargeable on the products manufactured without the aid and support of assessee company but marketed by using "Dabur" name, however, no basis has been given for the same. In our opinion the estimate made by the TPO for the rate of royalty was highly excessive. We, therefore, after considering the totality of the facts are of the view that the ld. CIT(A) was not justified in directing the AO to charge the royalty from Dabur International UAE @ 2%. Particularly when, the assessee was not using the technical know-how or R&D support from the assessee....
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....om M/s Dabur Nepal Pvt. Ltd. to increase the cost of purchases. Even if it is presumed that the royalty was to be charged by the assessee then same amount was to be added in the purchases thus the impact will be revenue neutral i.e. on the one hand, income will be increased by crediting the royalty and on the other hand, the cost of purchases will be increased by the same amount, since the sale was made by M/s Dabur Nepal Pvt. Ltd. to the assessee. In the present case, it is an admitted fact that there was no agreement in existence between the assessee and the AE i.e. M/s Dabur Nepal Pvt. Ltd. and nothing is brought on record to substantiate that the assessee incurred any expenditure which benefited M/s Dabur Nepal Pvt. Ltd. in any manner. Therefore, no royalty was payable to the assessee by M/s Dabur Nepal Pvt. Ltd. By considering the totality of the facts as discussed here in above, we are of the view that the royalty @ 2% directed to be charged by the ld. CIT(A) was not justified, therefore, the addition made on the said basis is deleted." 81.7 Since the facts of the present appeal are identical to the facts decided by the Tribunal in assessee's own case in the preceding asse....
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.... interest rate charged by Bank of Baroda for commercial papers was 5.675%. The TPO disagreed with the approach of the assessee and issued a show cause notice asking the assessee as to why rate of 14% should not be applied instead of 7% and 6.75%. The assessee objected to the TPO's proposition and made elaborate argument. 82.2 It was submitted that it has advanced short-term loan (less than a year) to its foreign AE and the interest charged by the assessee is more than what it took from the bank and, therefore, the interest charged from the AE was considered to meet the arm's length principle. It was argued that it is not the case of the Revenue that the assessee has taken loan from the bank and gave to its AE at nil rate of interest or lower rate of interest than what it was paying to the bank. The action of the assessee in the instant case suits to total arm's length behavior. So far as the financial health of the AE is concerned, it was submitted that it is only the parent company which knows it. It was submitted that the loan extended to AE was not for very long period of time and was for a short period of one year or less. Therefore, there was no big risk in offering the loa....
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....ts in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail '' 9.2 Thus, for loan transaction what is crucial is whether terms and conditions of loan offered in a controlled transaction can be compared with uncontrolled situation. What it means here is that whether loan advanced to foreign subsidiary was with borrowed money, or advanced from internal sources is totally irrelevant for the determination of ALP u/s 92(1) of the IT Act. Holding this position, in case of VVF v DCIT ITA No. 673/Mum/06, the Hon'ble Mumbai ITAT held as follows: "On a conceptual note, the purpose of making arms length adjustments, in prices at which which transactions have been entered into with associated enterprises is to nullify the impact of interrelationship between the associated enterprises. Unless the basis of which such hypothetical prices are computed is such that costs are to be taken into account, these hypothetical prices have no....
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....oney in foreign currency to its foreign subsidiaries the comparable transactions, therefore, was of foreign currency lended by unrelated parties. The financial position and credit rating of the subsidiaries will be broadly same as the holding company. In such a situation, domestic prime lending rate would have no applicability and the international rate fixed being LIBOR should be taken as the benchmark rate for the international transaction " "17. We further note that the appellant gas arrangement for loan from Citibank for less than 4%. However, for loan provided to its AEs it has charged 4% pa interest. Hence, adjustment suggested by the TPO is not warranted " In the above ruling of Cotton Naturals (supra) and other rulings as relied upon the appellant suggest that to benchmark loan transaction in case of international trade, LIBOR is best measure to compute the ALP u/s 92. 9.5 I find force in the arguments of the Appellant that in case of international loan given in international currency (USD in case of appellant), the interest rates to be applied should be LIBOR plus margin. The avg LIBOR rate for FY 2006-07 is determined at 5.20%. The appellant had....
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....d. vs. DCIT (ITA No. 22/Bang/2014) (vii) UCB India (P) Ltd. v ACIT 30 SOT 95 (viii) Easton Fluid Power Limited vs. ACIT (ITA No. 1623/PN/2011) (ix) Cybertech Systems & Software Ltd. vs. ACIT (ITA No. 7307/Mum/2012) (x) Gharda Chemicals Limited Vs DCIT, 130 TTJ 556 (xi) Destination of the World vs. DCIT [ITA No 5534/Del/2010] (xii) Interra Information Technologies India (P) Ltd. Vs. DCIT (ITA No. 5568&5680/Del/2011) (xiii) Honeywell Electrical Devices & Systems India Pvt. Ltd. vs. ACIT (ITA No. 2152/Mds/2011) (xiv) Lummus Technology Heat Transfer BV vs. DCIT (ITA No. 6227/Del/2012) 82.9 He accordingly submitted that since the assessee has charged interest on the loan @ 6.75%/7% from Dabur International, UAE being higher than the internal CUP where the interest rate charged by Bank of Baroda for commercial papers @ 5.675% has been treated as appropriate internal uncontrolled transaction, international transaction of interest received should be considered as being at arm's length applying the CUP method. 82.10 Without prejudice to the above, he submitted that the interest rate charged by the assessee is also....
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....above, he submitted that the LIBOR rates mentioned above averages out to 5.20% which is much lower than the rate of interest charged by the assessee on foreign currency loans advanced to its associated enterprises. He accordingly submitted that since the assessee has charged interest much higher than the LIBOR rates, no further adjustment is required. 82.13 We have considered the rival arguments made by both the sides, perused the orders of the AO/TPO/CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find, the assessee in the instant case has disbursed two loans to Dabur International, UAE at the interest rate of 6.5/7% the details of which are given below:- Particulars Amount (in Rs. crores) Loan given @ 6.75% Rs. 7 crores Loan given at 7% Rs. 20 crores Less: Repayment of loan during the year (Rs. 17 crores) Loan outstanding as on 31.03.2007 10 crores 82.14 During the impugned assessment year, the assessee has earned interest of Rs. 1,05,27,000/- on the aforesaid loans. In the TP study report the assessee applied internal CUP method where the interest rate charged by t....
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.... or between the enterprises entering into such transactions, which could materially affect the price in the open market; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction or the specified domestic transaction ;" 82.16 We find identical issue had come up before the Chennai Bench of the Tribunal in the case of VVF Ltd. vs. DCIT, vide ITA No.673/Mum/2006 where the Tribunal in a case involving transaction of loan advanced to the associated enterprise, has held as under:- "We have noted that as was also noted by the Transfer Pricing Officer himself at page 3 of his order the appellant has borrowed foreign currency loans in US Dollars and for the purposes of investing in subsidiaries abroad, from ICICI Bank at the rate of LIBOR + 3% The appellant has also filed a letter from Bank of India stating that "during March 2002, we have been charging spreads of 150 bps to 300 bps over LIBOR in respect of foreign currency loans based on financial position and credit rating of the borrower". As for the LIBOR rate, as per the information ....
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....nd are dependent upon the fiscal policy of the Central bank, mandate if the Government and several other parameters. Interest rates payable on currency specific loans/ deposits are significantly universal and globally applicable. The currency in which the loan is to be re-paid normally determines the rate of return on the money lent, i.e., the rate of interest." 82.19 We find, the coordinate Bench of the Tribunal in the case of Bharti Airtel Limited vs. ACIT: 161 TTJ 428, too, has held that in a case where loans are advanced in foreign currency, the interest rate on foreign currency loans being qualitatively different, and accordingly, even if one has to see the interest that the assessee would have earned, one has to see the interest that the assessee would have earned on foreign currency loans and not rupee denominated loans. 82.20 We further find merit in the argument of the ld. Counsel that the Revenue / TPO himself in the case of Perot Systems TSI (India) Ltd. Vs. DCIT (2010-TIOL51- ITAT-Del.) and in the case of DDIT vs. Development Bank of Singapore: 144 ITD 265 (Mum), has applied LIBOR rate for benchmarking of international transaction of loans undertaken with the AE. ....
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....C in Form No.10CCB and its annexures in respect of units of the above undertakings, the AO noted that transactions of transfers/sale of stocks of substantial amount/value from and to related units as well as to corporate office by the assessee company have been reported. The AO noted that gross total income of the assessee company includes profits of Rs. 30285.30 lakh with net profit ratio of 26.90% on the sales and other income of Rs. 112781.27 lakh from the units eligible for deduction u/s 80IB and 801C whereas the assessee company has declared net profit of Rs. 28422.30 lakh on the total sales of Rs. 179453.60 lakh as per consolidated profit & loss account of all the units resulting in net profit ratio of 15.83% to the total sales of all the units, therefore, deduction U/s 80IB and 80IC be computed accordingly. 85. The AO, therefore, asked the assessee to explain the deduction claimed u/s 80IB/80IC to which the assessee complied. However, the AO disregarded the arguments advanced by the assessee and allocated certain cost on account of depreciation and other expenses to the non-taxable zones and accordingly reduced the claim of deduction u/s 80IB/80IC. As per the details belo....
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....Therefore, these expenses have not been claimed by the assessee. However, the AO has erroneously allocated these expenses to all the units in the ratio of sales percentage and accordingly has worked out reduced profits in respect of tax holiday units. So far as the scientific research expenses is concerned, it was submitted that the assessee has claimed weighted deduction @ 125% u/s 35(1)(ii) of the Act in respect of contribution made to an association for scientific research. The payment is voluntary in nature and is not for any specific purpose. Further, these expenditure cannot be allocated to tax holiday units as it is not connected with such units. Relying on various decisions and the word used in section 80IC 'derived from' and 'not attributable to' it was argued that R&D expenses cannot be allocated to units claiming deduction unless it has a nexus. 89. Based on the arguments advanced by the assessee, the ld.CIT(A) directed the AO to recompute the deduction available u/s 80IB/80IC without further allocation of head office expenses to various units by observing as under:- "15.0 Finding: 15.1 I have carefully gone through submissions of the appellant....
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....s was debited to the Profit & Loss Account. He submitted that in the computation of income, the assessee has added back the aforesaid depreciation under Companies Act and claimed depreciation of Rs. 2902.3 lakhs in accordance with the provisions of section 32 of the Act which is evident from page 425 of the paper book Volume-II. He submitted that depreciation as claimed in the return of income was fully allocated among all the units including eligible units. Therefore, when the assessee has already disallowed the depreciation under Companies Act and has only claimed depreciation as available under the I.T. Act which was allocated to various units, therefore, there was no reason on the part of the AO to allocate the difference between the depreciation charged in the P&L Account and depreciation claimed in the return of income. 91.1 So far as the allocation of head office expenses is concerned, the ld. Counsel drew the attention of the Bench to the following table:- S. No. Particulars Amount (in Rs. lakhs) 1. Miscellaneous expenses written off 1054.12 (a) ESOP expenses 1035.37 (b) Technical know-how 18.75 2. ....
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....sessee has itself added back the depreciation as per Companies Act, 1956 and claimed depreciation as per the Act and, therefore, the AO was wrong in allocating difference of depreciation available under the Companies Act and the Income-tax Act to the eligible units. So far as the head office expenses aggregating to Rs. 2,214.02 lakhs is concerned, he noted that expenses aggregating to Rs. 1,563.02 lakhs were suo motu disallowed by the assessee and added back in the computation of income. Therefore, once these expenses were not claimed by the assessee, the same cannot be allocated to the eligible units for computation of deduction u/s 80IB/80IC of the Act. The ld.CIT(A) also further noted that scientific research expenses of Rs. 651 lakhs, which was included in the head office expenses allocated by the AO are not connected with the units eligible for deduction u/s 80IB/80IC of the Act and, therefore, cannot be allocated to the eligible units. 93.1 We do not find any infirmity in the order of the CIT(A) reversing the action of the AO in allocating the head office expenses and depreciation to various eligible units for the purpose of recomputing the deducting u/s 80IB/80IC. The fac....
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.... not claimed as a deduction by the assessee, the same, in our opinion, cannot be allocated to the eligible units and be considered for computing the deduction u/s 80IB/80IC of the Act. 93.5 So far as scientific research expenses of Rs. 651 lakhs is concerned, the finding of the ld. CIT(A) that such expenses have no nexus with the units eligible for deduction has not been controverted by the Revenue. We find, the Hon'ble Bombay High Court in the case of Zandu Pharmaceuticals Works Ltd. vs. CIT, 350 ITR 366 (Bom) has held that once the expenses have no nexus with the units eligible for deduction, such expenses cannot be allocated to units for the purpose of computing deduction u/s 80IB/80IC of the Act. Since the scientific research expenses of Rs. 651 lakhs which were included in the head office expenses allocated by the AO are not connected with the units eligible for deduction u/s 80IB/80IC, the same, in our opinion, cannot be allocated to the eligible units. In this view of the matter, the order of the CIT(A) is upheld and the ground raised by the Revenue on this issue is dismissed. 94. In ground of appeal No.7, the Revenue has challenged the order of the CIT(A) in deleting ....
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....of letter dated 10.09.2018 addressed by Pr. Director of Income-tax (Legal and Research), New Delhi regarding filing of appeal in cases involving issue of allowability of deduction of employees' contribution to PF and ESIC copy of which is placed at page 442 and 443 of the paper book, he submitted that the Department should not have filed appeal on this issue. 99. We have considered the rival arguments made by both the sides, perused the orders of the AO/CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find, the AO, in the instant case, made addition of Rs. 4,09,871/- u/s 36(1)(va) r.w.s. 2(24)(x) of the Act on the ground that the employees' contribution to ESIC were deposited much after the specified dates mentioned in the said Act. We find, the ld.CIT(A) deleted the addition on the ground that although such payments were made /deposited after the due date prescribed in the ESI Act, however, such deposits were made prior to the date of filing of the return u/s 139(1). We find, the Hon'ble Delhi High Court in the case of CIT vs. Bharat Hotels Ltd., reported in (2019) 410 ITR 417 has held that Employees' S....
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.... dividend income of Rs. 30,000 which is exempt has been earned during the period under consideration and no expenses have been incurred to earn this income. 24.2 Following is the investment schedule of the Appellant has on 31 March 2006/07: Description FY 2006-07 FY 2005-06 Remark Mutual Fund 7,962 6,266 These MFs represent Short term Mutual funds and are fully taxable u/s 45. Dabur International Limited, UAE 4,466 2287.5 This is investment in foreign subsidiary and foreign dividends are taxable Commerce Centre Cooperative Housing Society Limited 0.02 0.02 Capexil (Agencies) Limited 0.01 0.01 Dabur Employees Consumers Co-op Stores Limited 0.03 0.03 There can be no earnings Dabur Employees Cooperative Credit Society Ltd 0.07 0.07 from investment in these instrument Co-operative Stores Limited, Super Bazar 0.05 0.05 Saraswat Co-op Bank Ltd 0.1 0 National Saving Certificates 1.07 0 Income earned on this Investment is taxable as per income Tax Act 1961 Kisan Vikas Patra 0.07 0 Dabur Foods Ltd 2,000 ....
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....e to ascertain whether there exists an nexus between borrowed funds and tax free investment. This principle has been laid down in following cases: * Hero Cycles 323 ITR 518 (P&H) * DCIT v Maharashtra Seamless Ltd. (2011) 16 Taxman.com 97 (Del) 24.7 The AO has made a disallowance of Rs, 1.57 crores u/s 14A as expenses incurred in relation to tax free dividend income of Rs. 30^000 only. This is nothing but travesty of justice Obviously, intention of the legislature was not to compute disallowance under sub-sect on 2 c f section 14A mechanically in a case where no expenses have been actually incurred in relation to tax free income. 24.8 In view of above, the AO is directed to deletethe addition made on this count The ground of appeal is accordingly allowed." 103. Aggrieved with such order of the CIT(A), the Revenue is in appeal before the Tribunal. 104. The ld. DR heavily relied on the order of the AO. The ld. Counsel, on the other hand, while supporting the order of the CIT(A) submitted that Rule 8D could not have been applied mechanically more so when the said Rule is not applicable to the year under consideration. Further, only investment y....
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....ny satisfaction, provisions of section 14A cannot be applied mechanically. Further, the interest expenditure, if any, relatable to dividend yielding investment has to be considered as held in various decisions. It is also held in various decisions that only investments yielding dividend income has to be considered for the purpose of making disallowance u/s 14A. Under these circumstances, we are of the considered opinion that the AO was not justified in applying the provisions of section 14A r.w. Rule 8D and disallow an amount of Rs. 1,57,45,700/- u/s 14A r.w. Rule 8D as against the actual dividend income of Rs. 30,000/-. It has been held in various decisions that the disallowance cannot exceed the exempt income. Since the assessee in the instant case has earned dividend income of only Rs. 30,000/- during the impugned assessment year, therefore, following the decision of the Hon'ble Delhi High Court in the case of Joint Investment Pvt. Ltd. vs. CIT, 372 ITR 694 where it has been held that disallowance u/s 14A cannot exceed exempt income and the SLP filed by the Revenue has been dismissed by the Hon'ble Supreme Court, we accept the alternate contention of the assessee that the disall....
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.... in case of Kedarnath Jute Manufacturing (Supra). Besides this, the Appellant also claimed that depreciation is allowable on goodwill even though it is not claimed in return of income, in view of explanation 5 to section 32 which is reproduced as below: 32. Depreciation. (I) In respect of depreciation of- (i) buildings, machinery, plant or furniture, being tangible assets; (ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day ;: April 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed- ................ .............. Explanation 5.- For the removal of doubts, it is hereby declared that the provisions of this sub¬section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income; 27.3 I have gone through the contentions made by the Appellant. I agree with contention of the appellant that manner of making entry in books ....
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....or accounting procedure of amalgamation. Facts of the case of CIT v SMIFS Securities Ltd. (supra) are essentially similar to facts of the present case. Accordingly, I hold that the excess paid over net assets amounting to Rs. 158.75 crores is in nature of goodwill within the meaning of section 32(1) of the Act r.w. explanation 3(b). 27.6 It's trite law that the AO is bound to complete assessment as per the provisions of the Act The Appellant pointed out to the AO in course of assessment proceedings that depreciation of goodwill should be allowed to it in view of explanation 5 of section 32(1) of the Act which was ignored by the AO. Once it is held that excess payment is in nature of goodwill, in view provisions of explanation 5 of section 32,(1), the allowance of depreciation is mandatory even if not claimed by the appellant in its return of income. Accordingly, I direct the AO to allow depreciation @ 25% on the goodwill. With this, the ground of appeal is allowed." 110. Aggrieved with such order of the CIT(A), the Revenue is in appeal before the Tribunal. 111. The ld. DR, strongly challenged the order of the CIT(A) in allowing the depreciation on goodwill on the gro....
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....114. Referring to the notes to accounts of the audit report, he submitted that the aforesaid facts were also duly stated in the Notes to Accounts, appended to the audited accounts. The ld. Counsel for the assessee submitted that the excess consideration of Rs. 158.75 crores was paid by the assessee to acquire various intangibles of Balsara group of companies, being brand and other commercial rights, all referred to as goodwill. He submitted that "Goodwill" described as such, is a compendious of various intangible business and commercial rights resulting in whole advantage to the business, which may be on account of various factors like location, contracts, personnel including management experience/ history, existing customer base, licenses, trade name/ logo, etc. The ld. Counsel for the assessee submitted that the following factors justify "goodwill" of Balsara business: "a) Balsara Group was established in the year 1925. The group companies mainly focuses on manufacturing oral care products, insect repellents, air fresheners and household cleaners with Odonil, Odomes, Sani Fresh as its famous products; b) Balsara Group had gained a commendable position in both do....
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....business value. The major sales of such companies depend upon their brand name. He submitted that in the FMCG sector, one needs to be fast in translating the ideas into new products. There is a requirement to create the products that people trust, enjoy and use in their daily lives. Advertising and marketing have a vital role to play in this. People now are getting more & more health conscious and are getting concerned about what they are using. They buy only those products which are of a good quality and are of a reliable brand. 114.2 He submitted that the products offered by Balsara companies are of a good standard quality and reliable which is the main factor contributing to the why people prefer buying its products. He submitted that Balsara brand was well established. To build such a brand, it takes a lot of effort, time and energy. A lot of time goes into building up a good brand name. There are very few branded products like Procter and Gamble, Colgate, Godrej, etc. Brand creates entry barriers and is created over the years. A new player, who enters a market, also needs to spend time, energy and effort to build its name in the market. Thus a new player can break a market ....
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....m 82 (Guj); 5) CIT v. Hindustan Coca-Cola Beverages (P) Ltd.: 331 ITR 192 (Del.) - SLP filed by revenue has been dismissed by the Supreme Court in SLP No. 26151/2011; 6) PCIT vs. Ricoh India Ltd: ITA No. 1127 of 2017 (Bom HC); 7) B. Raveendran Pillai: 332 ITR 531 (Ker.); 8) CIT v. Manipal Universal Learning (P.) Ltd : 215 Taxman 151 (Kar.); 9) Pr. CIT v. Swastik Industries: 240 Taxman 510 (Guj); 10) ACIT vs. M/s Birla Global Asset Finance Co. Ltd.: ITA No. 48984900/Mum/2008 -affirmed by the Bombay High Court: (2014) 221 Taxman 176; 11) CIT vs. RFCL Ltd.: (2015) 277 CTR 272 (HP.); 12) Decision of Special Bench of the Delhi Tribunal in the case of M/s. CLC & Sons Pvt Ltd. Vs. ACIT: 171 ITD 139, 13) DCIT vs. Toyo Engineering India Ltd: ITA No. 3279/M/ 2008; 14) Aricent Technologies (Holdings) Ltd. vs. DCIT: 109 taxmann.com 47 (Delhi ITAT), 15) Sartorious Mechatronics India (P.) Ltd. vs. ACIT: 982/Bang/2013 (Bang.); 16) DCIT vs. Bosch Ltd: ITA No. 329/Bang/2009 (Bang.); 17) Samsung R&D Institute India Bangalore Pvt. Ltd. vs. ACIT: ITA No. 672/Bang/2014 (Bang. Trib.); ....
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.... the ld.CIT(A) is not justified in allowing the claim of depreciation on goodwill. It is the submission of the ld. Counsel for the assessee that the difference between the consideration paid by the assessee to acquire the business and net worth of the companies acquired by it represents the intangibles and other factors in the form of goodwill which were in accordance with the scheme of amalgamation. It is his submission that the amount representing the excess of consideration of Rs. 158.75 crores paid over the fair value of net assets of transferor companies recognized as goodwill fall within the ambit of the expression 'business or commercial rights of similar nature' so as to qualify for depreciation u/s 32 of the IT Act. 114.7 We find, force in the above argument of the ld. Counsel for the assessee. We find, the Hon'ble Supreme Court in the case of CIT vs. Smifs Securities Ltd. (supra) while discussing an identical issue has observed as under:- "1. None appears for the respondent, though served. Heard learned counsel for the Department. Leave granted. This civil appeal concerns the Assessment Year 2003-2004. Three questions arise for determination by this Court. The....
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....Explanation 3 states that the expression `asset' shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading the words `any other business or commercial rights of similar nature' in clause (b) of Explanation 3 indicates that goodwill would fall under the expression `any other business or commercial right of a similar nature'. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). 5. In the circumstances, we are of the view that `Goodwill' is an asset under Explanation 3(b) to Section 32(1) of the Act. 6. One more aspect needs to be highlighted. In the present case, the Assessing Officer, as a matter of fact, came to the conclusion that no amount was actually paid on account of goodwill. This is a factual finding. The Commissioner of Income Tax (Appeals) [`CIT(A)', for short] has come to the conclusion that the authorised representatives had filed copies of the Orders of the High Court ordering amalgamation of the above two Companies; that the assets and lia....
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....on despite the fact that the assessee raised such claim vide its letter dated 13.12.2010 addressed to the AO. In this view of the matter and in view of the detailed reasoning given by the CIT(A) on this issue, we find no infirmity in his order allowing claim of depreciation on goodwill. The order of the ld.CIT(A) on this issue is accordingly upheld and the ground raised by the Revenue on this issue is accordingly dismissed. 115. Now, coming to the additional ground of appeal, we find, the assessee in the impugned assessment year has raised the following additional ground:- "That the ESOP expenses of Rs. 10,35,36,606/- debited in the Profit & Loss Account ought to have been allowed as deduction in computing the income under the head 'Profit and Gains of Business." 115.1 The Id. Counsel for the assessee, referring to the above additional ground, submitted that this ground deserves to be admitted in order to correctly assess the tax liability of the assessee in accordance with the provisions of law. He submitted that the above ground does not require any new fact or other than the facts already on record. Referring to the decision of the Hon'ble Supreme Court in the cas....
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....assessee. The relevant observations of the Tribunal read as under:- "87. We have considered the submissions of both the parties and carefully gone through the material available on the record. It is noticed that the additional ground has been raised by the assessee relating to the ESOP expenses which were debited in the profit and loss account but added back while computing the income allegedly under some misconception of facts and law. The issue raised by the assessee is a legal issue. 88. As regard to the admission of the legal ground, the Hon'ble Supreme Court in the case of National Thermal Power Company Ltd. Vs CIT (1998) 229 ITR 383 (supra) held as under: "The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assessee correctly the tax liability of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a nontaxable item is taxed or a permissible deduction is denied, there is no reason why the assessee should be prevented from ....
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.... 116. The grounds raised by the Revenue are as under:- "On the facts in the circumstances of the case the Ld. CIT(A) has erred in allowing appeal of the assessee and directing to deleted addition of Rs. 1,64,36,480/- made by the Assessing Officer on account of corporate guarantee given to the associated enterprises. 1. On the facts in the circumstances of the case the Ld. CIT(A) has erred in allowing appeal of the assessee and deleted addition of Rs. 2,80,55,365/- made by the Assessing Officer on account of interest on loan to the associated enterprises. 2. On the facts in the circumstances of the case the Ld.CIT(A) has erred in allowing appeal of the assessee and deleted addition of Rs. 1,91,30,000/- made by the assessing officer on account of royalty adjustment. 3. On the facts in the circumstances of the case the Ld.CIT(A) has erred in allowing appeal of the assessee and directing the Assessing Officer to recompute the deduction u/s 80IB and 80IC without further allocation the Head Office expenses to various units and allowed the appeal of the assessee. 4. On the facts in the circumstances of the case the Ld.CIT(A) has erred in allo....
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.... the AEs to the asses see for completing the brand and consequently the addition as made by the TPO and sustained by the CIT (Appeals) in respect of the alleged royalty chargeable from Dabur International Ltd., Dabur Nepal Pvt. Ltd. and Asian Consumer Care Ltd. is arbitrary, unjust and at any rate very excessive. 5. That the TPO and CIT (Appeals) failed to appreciate the relevant clause of the agreement as existed in earlier years wherein as per the agreement, Dabur India Ltd. failed to incur the expenses for the promotion of the brand and marketing expenses in Dabur Nepal Pvt. Ltd., which ultimately and actually were incurred by Dabur Nepal Pvt. Ltd., which resulted into termination of the royalty chargeable under the then contract and consequently the CIT (Appeals) has erred on facts and under the law in upholding the chargeability of the royalty from Dabur Nepal Pvt. Ltd. 6. That the TPO and CIT (Appeals) failed to consider that most of the manufactured products by Dabur Nepal Pvt. Ltd. had been sold to Dabur India Ltd. which cannot be the basis for charging royalty having no connection with the brand used by Dabur Nepal Pvt. Ltd. in Nepal. 7. That in ....
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....5% p.a Naturalle LLC, UAE USD 0.60 crores Rs. 13.06 crores The Royal Bank of Scotland, UAE 3 mnths LIBOR + 1.50% (20.05.2007 to 15.09.2007) 3 mnths LIBOR + 0.475% (16.09.2007 to 23.03.2008) 3 mnths LIBOR + 0.475%/0.875% for USD 28 lakhs and 32 lakhs resp. (24.03.2008 to 31.03.2008) Total Rs. 28.52 crores ' 122. It was contended in the TP report that the transaction being in the nature of shareholder activity, could not be considered as an international transaction in terms of section 92B of the Income Tax Act, 1961 and, accordingly no benchmarking was undertaken. However, the TPO rejected the contention of the assessee and computed guarantee fee at the rate of 4.68% on the basis of data obtained from State Bank of India u/s 133(6) of the Act and calculated as under:- Particulars Rate (in %) Average rate of bank rate of commission charged 2.68 Add:- Risk Adjustment 2 Rate 4.68 123. He accordingly, made an upward adjustment of Rs. 1,12,23,576 (4% of Rs. 39.44 crores) to the total income of the assessee. 124. In appeal, the CIT(A) held that issuance of corporate guarantee is an international transaction a....
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....LC, UAE. The grounds of appeal Nos.7 and 8 filed by the assessee are accordingly partly allowed. 128. Ground of appeal No.1 filed by the Revenue relates to the order of the CIT(A) in deleting the addition of Rs. 2,80,55,365/- made by the AO on account of interest on loan to the associated enterprise. 129. After hearing both the sides, we find the above ground is identical to ground of appeal No.3 in ITA No.3114/Del/2014 filed by the Revenue for A.Y. 2007-08. We have already decided the issue and the ground raised by the Revenue has been dismissed. Following similar reasonings, this ground filed by the Revenue is dismissed. 130. Ground No.3 raised by the Revenue relates to the order of the CIT(A) in directing the AO to recompute the deduction u/s 80IB and 80IC without further allocation the Head Office expenses to various units eligible for such deduction. 131. After hearing both the sides, we find the assessee in the instant case has already disallowed depreciation under Companies Act and has claimed depreciation under Income-tax Act and has duly allocated to various units. Similarly, selling and distribution expenses of Rs. 789.37 lakhs was suo moto disallowed in the c....
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....Sixty One Thousand One Hundred Sixty Five only) being the exempted excise duty embedded in sales of Glucose Unit, Baddi (HP), allowed incentive for industrialization and setting up of new unit by Notification No. 1(10)/2001 NER dated 701/2003, read with Notification No. 49/2003 and Notification No. 50 of 2003 of Central Excise dated 10/06/2003, is a capital receipt not liable to Tax and accordingly the amount of Rs. 5,85,61,165/- (Rupees (Rupees Five Crore Eighty Five Lakhs Sixty One Thousand One Hundred Sixty Five only) be excluded from the income assessed." 137. The ld. Counsel for the assessee while explaining the reasons for admission of the additional ground in his application submitted that the assessee has a manufacturing unit located at Baddi, Himachal Pradesh which was set up in 2003 (25.01.2003) for the manufacture of Glucose which was eligible for deduction u/s 80IC of the Act. Since assessment year 2003-04, all the related particulars were duly furnished before the AO. The manufacturing unit was set up under the Policy of the Central Government to boost industrialization of Himachal Pradesh and Uttarakhand. The said scheme was introduced vide notification F. No. 1(10....
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....ment, are entitled to : (a) 100% (hundred percent) outright excise duty exemption for a period of 10 years from the date of commencement of commercial production. (b) 100% income tax exemption for initial period of five years and thereafter 30% for companies and 25% for other than companies for a further period of five years for the entire states of Uttaranchal and Himachal Pradesh from the date of commencement of commercial production. (II) All New industries in the notified location would be eligible for capital investment subsidy @ 15% of their investment in plant & machinery, subject to a ceiling ofRs. 30 lakh. The existing units will also be entitled to this subsidy on their substantial expansion, as defined. (III). Thrust Sector Industries as mentioned in Annexure-II are entitled to similar concessions as mentioned in para 3(1) & (II) above in the entire state of Uttranchal and Himachal Pradesh without any area restrictions. " (emphasis supplied) 138. In pursuance of the said scheme, notification was also passed by the Central Excise Authorities vide notification No. 49/2003, dated 10th June 2003, the relevant extract of which is as u....
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....t, 1985 (5 of1986), other than the goods specified in Annexure-I appended hereto, and cleared from a unit located in the Industrial Growth Centre or Industrial Infrastructure Development Centre or Export Promotion Industrial Park or Industrial Estate or Industrial Area or Commercial Estate or Scheme Area, as the case may be, specified in Annexure-II appended hereto, from the whole of the duty of excise or additional duty of excise, as the case may be, leviable thereon under any of the said Acts. 2. The exemption contained in this notification shall apply only to the following kinds of units, namely (a) new industrial units which have commenced their commercial production on or after the 7th day of January, 2003; (b) industrial units existing before the 7th day of January, 2003, but which have undertaken substantial expansion by way of increase in installed capacity by not less than twenty five per cent, on or after the 7th day of January, 2003. 3. The exemption contained in this notification shall apply to any of the said units for a period not exceeding ten years from the date of publication of this notification in the Official Gazette or from t....
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....ourt, after following the purpose test as explained in Sahney Steel (supra) held that the point of time at which subsidy is paid is not relevant. The source and form of subsidy is also material. If the object of incentive is to set up a new unit or extend the existing unit, then, it would be on capital account. Referring to the decision of the Hon'ble Supreme Court in the case of Ponni Sugar & Chemicals Ltd. (supra) he drew the attention of the Bench to the following observation of the Hon'ble Apex Court:- "14. In our view, the controversy in hand can be resolved if we apply the test laid down in the judgment of this Court in the case of Sahney Steel and Press Works Ltd. (supra). In that case, on behalf of the assessee, it was contended that the subsidy given was up to 10% of the capital investment calculated on the basis of the quantum of investment in capital and, therefore, receipt of such subsidy was on capital account and not on revenue account. It was also urged in that case that subsidy granted on the basis of refund of sales tax on raw materials, machinery and finished goods were also of capital nature as the object of granting refund of sales tax was that the asse....
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....nit then the receipt of the subsidy was on capital account. Therefore, it is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. The form of the mechanism through which the subsidy is given is irrelevant. " 143. He submitted that similar principle has been reiterated by the Hon'ble Supreme Court in the case of CIT vs. Chaphalkar Brothers: 351 ITR 309 (Bom). In that case, the subsidy scheme of the State Government provided for an exemption of entertainment duty in Multiplex Theatre Complexes newly set up, for a period of three years, and thereafter payment of entertainment duty at the rate of 25 per cent for the subsequent two years. In the assessment order it was found that the aforesaid scheme was really to support the on-going activities of the multiplex and not for its construction. The Assessing Officer held that since the scheme took the form of a change in the gross value of the ticket and contributed towards the dayto-day running expenses, it was in the nature of a revenue receipt. The ld. CIT(A) dismissed the appeal. On further appeal, the Tribunal decided the ground in favour of the assessee holding that the receipt....
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....e cost of construction (apparatus, interiors etc. included), even if it were "before completion of five years " 36. As held by the Supreme Court in the case of Sahney Steel & Press Works Ltd. (supra), the character of the subsidy is to be determined having regard to the purpose for which it is granted. The "purpose test", referred to in Ponni Sugars & Chemicals Ltd. (supra) when applied to the case at hand, leaves no room for doubt that the assistance in the form of entertainment tax exemption is shown to have come in the hands of assessee to enable it to set up the new unit which renders it a receipt on capital account. The periodicity (year to year) of the subsidy, its source (collections from the public at large) and the form (deemed deposit) are irrelevant considerations. .................... 39. For the foregoing reasons, we find that ITAT in the impugned orders has taken a correct view of law on the basis of available facts to conclude that the assessee is entitled, in terms of the UP Scheme, to treat the amounts collected towards entertainment tax as capital. The question of law raised in these appeals is, thus, answered in the negative against the....
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....All.); viii) Abdul Qayume vs CIT: I 84 ITR 404 (All); ix) Nirmala L Mehta vs CIT: 269 ITR 1 (Bom); x) CIT vs Berger Paints: 254 ITR 503 (Cal); xi) R. B. Jessa Ram Fateh Chand vs CIT: 81 ITR 409 (All); xii) CIT vs Enron Expat Services Inc : 327 ITR 626 (Uttkhd); xiii) Smt. Snehlata Jain v. CIT: 192 CTR 50 (J&K); xiv) S.R. Koshti v. CIT: 276 ITR 165 (Guj.); xv) DCIT v. Sanmukhdas Wadhwani: 85 ITD 734 (Nag); xvi) Indo Java & Co. v. IAC: 30 ITD 161 (Delhi SB); and xvii) ITO v. GE Hawn : 2l ITD 553 (All.) 148. Referring to the following decisions, the ld. Counsel for the assessee submitted that additional ground on issue of subsidy was raised for the first time before the Tribunal in the following cases and were admitted:- i) Shree Balaji Alloys vs. ITO: 127 T'TJ 129 (Asr ITAT) - Confirmed by Supreme Court in Civil Appeal No. 10061 of 2011; ii) Indo Java & Co. vs. IAC: 30 ITID 161 (Del ITAT)(SB); iii) Crystal Crop Protection Pvt Ltd. vs. DCIT : ITA No. 1539 of 20l6 (Del ITAT); iv) Tripti Manthol Inds vs. ITO: ITA No, 58 of 2011 (Asr ITAT). 149. He submi....
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....he exempted excise duty to be excluded from the income assessed on the ground that same being a capital is not liable to tax and be excluded from the income assessed. 153. The issue in our opinion, is legal in nature. The Hon'ble Supreme Court in the case of NTPC Ltd. vs. CIT reported in 229 ITR 383 has held as under:- "The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assessee correctly the tax liability of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction is denied, there is no reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of the item. There is no reason to restrict the power of the Tribunal under section 254 only to decide the grounds which arise from the order of the Commission of Income-tax (Appeals). Both the assessee as well as the Department have a right to f....
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....ench, in paragraph 17 of the judgment held that the Supreme Court dismissed the appeal making it clear that the decision was limited to the power of the assessing authority to entertain a claim for deduction otherwise than by a revised return and did not impinge on the powers of the Tribunal. In paragraph 19, the Division Bench held that there was no prohibition on the powers of the Tribunal to entertain an additional ground which, according to the Tribunal, arises in the matter and for the just decision of the case. 31. In the circumstances, it is not necessary to decide the other questions raised by Mr. Mistri. 32. The appeal is, therefore, dismissed." 156. In view of the above discussion and keeping in mind the ratio laid down by the Hon'ble Supreme Court in the case of NTPC Ltd. (supra), the Hon'ble Delhi High Court in the case of Jai Parabolic Springs Ltd. (supra) the decision of Hon'ble Bombay High Court in the case of Pruthvi Brokers and Shareholders (P) Ltd. (supra) and various other decisions relied on by the ld. Counsel for the assessee, we admit the additional ground raised by the assessee. However, it is an admitted fact that this issue has been rai....